All Hail The Great FICO: Are You in Credit Bondage?

Like many people, I used to worry a lot of about my credit score. In life, it seemed that the credit score determined a number of things such as:

• The amount of interest I would pay on borrowed credit
• The amount I would pay on my vehicle/mortgage insurance
• The types of apartments I could rent
• The amount of funding I could obtain on a mortgage

It seemed that FICO was the master, and I was its servant. I dutifully kept my credit accounts open, financed purchases, and attempted to pay on all of them. When my husband and I hit a snag in our finances, we began getting those calls, “If you don’t make a payment, if could affect your credit score.” I would make a small payment, but compromise the household budget by using money from the food, gas, utility, or food fund. How could I have been so dumb? Enter The Great FICO. All Hail The Great FICO!

It took experience, my grandfather, and Dave Ramsey to help me understand credit and the FICO Score. Dave Ramsey calls this the “I Love Debt” Score.

Understanding the “I Love Debt” Score

According to FICO (What’s In your FICO score), your credit score is based on the following five factors:

This means that in order to maintain a great FICO score, you have to use credit for a certain period of time, balance that with a certain number of credit accounts for a certain length of time, and continuously obtain new accounts and types of credit.

The FICO score doesn’t account for the fact that you have saved $50,000 in an emergency fund. It doesn’t account for the fact that you make $7.25 per hour or $100,000 per year. It only cares that you use credit (credit cards, car loans, student loans, medical bills, payday loans, rent-to-own accounts, and installment loans). Thanks, but no thanks.

What’s Affecting My FICO Score

You can always get a free copy of your credit report at https://www.annualcreditreport.com/. You are entitled up to three free credit reports per year. If you want to check your credit report year-round, I suggest ordering one from Experian on January 1, one from Equifax on May 1, and one from TransUnion on September 1. Then, repeat the order process the following year.

A word of caution, be sure to select the option that does not include the FICO Score. You will be required to pay extra for your FICO Score. Also, do not use that credit reporting company with the cute jingles. Their credit reports are not free.

Life without the FICO Score

You can still have a life without The Great FICO while becoming debt free:

• Credit Accounts: As you are eliminating debt, be smart about how you pay down your credit accounts and when you choose to close your credit accounts by working your Debt Snowball. Remember, The Great FICO doesn’t care about tangible things like people and cash; it only cares about credit. In my book, he’s a superficial tyrant.
• Vehicle/Mortgage Insurance: There is a high likelihood that the FICO Score will still determine your insurance rates. Educate yourself by calling your insurance company and find out how they use the FICO Score to determine your rates. Before you call, read this document on FICO Credit-Based Insurance Scores produced by the Fair Isaac Corporation, administers of the FICO Score.
• Apartment Leasing: When I rented my first apartment in college, I had just started using credit and probably did not have a great FICO Score. What I did have was a decent savings account (by college student standards) and stable employment with one employer for three years. Based on the latter, they leased the apartment to me. Here is an example of how one residential property management company views you and your FICO Score.
• Mortgages: If you want to buy a home, you still can without a FICO Score, or a great FICO Score for that matter. You’ll need to save 20% of the amount of the house you want to purchase and have a stable job for at least two years. Before you start the process of buying a home, you can ask your lender about manual underwriting.

Dave Ramsey offered some tips on CBS Early Show for people who are still “worshipping at the altar of The Great FICO.”